Vodafone can hardly be accused of having feeble ambitions. When the telecoms firm launched its improvement plan in 2013, under the codename Project Spring, it said it wanted to become one of the top-two providers in all of its markets.
But five years on, shares have slumped by 25 per cent and investors are beginning to wonder whether those goals are achievable.
The firm has been pushed to pay off its £46billion debt pile, has struggled with exchange rates in some foreign markets and analysts have stubbornly refused to upgrade its earnings predictions this year.
Vodafone shares have slumped by 25 per cent over the past five years
As Vodafone’s half-year results approached this week, one shareholder told the Mail there were questions over whether the business would carry on paying its attractive dividend.
As it turned out, chief executive Nick Read – who took over from former boss Vittorio Colao last month – decided not to axe the £3.4billion payout to shareholders. But whether that will be the right move in time is still a matter for debate.
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Berenberg analyst Usman Ghazi said: ‘It’s perfectly fine if you want to cut the dividend and tell investors you’re going to do a certain thing with the headroom you’ve created.
‘But at Vodafone that narrative doesn’t exist, so cutting the dividend would be a lazy thing to do.’
For some time Vodafone has been struggling to draw investor sentiment on side, and cutting the dividend would at least have given the appearance that management were doing something.
First, Ghazi explains, investors who are looking at the telecoms sectors steer towards companies that have garnered earnings upgrades – where analysts have boosted their estimates for the firm’s financial performance.
But the upgrades landscape for Vodafone has remained bleak this year. Part of this is down to currency headwinds in markets such as Turkey and South Africa that provide much of its revenue growth.
Second, government auctions for the new ‘superfast’ mobile internet 5G have been more expensive than expected so far.
Vodafone won a large chunk of the 5G airwaves in the UK, paying a hefty £378.2million. But it paid £2.1billion in Italy, and such a high price has made traders nervous about upcoming auctions in Germany.
Slashing the dividend would have reassured the market that the firm had a little more cash in its pocket if conditions became even tighter.
Jerry Dellis, an analyst at Jefferies, suggests that the decision to leave dividends flat on last year, while aiming to decrease debt, ‘leaves little margin for error as competitive conditions and spectrum outcomes remain largely outside management’s control’.
Read, 54, is now planning to cut £1billion of costs in three years instead of five, by simplifying and digitalising the business.
Underlying profits rose 2.9 per cent to £6.2billion in the six months to September. Though sales had slowed, the firm managed to wring out cost savings which pushed up profits.
Analysts at Bernstein called the results ‘expectedly wretched’, but said the full-year earnings guidance and maintained dividend were ‘positive and good news for investors in this beleaguered name’.
Ghazi believes investors will be rewarded further if they have the patience to stick around. ‘We don’t see risk to the dividend,’ he says. ‘But you’ve got to be patient.’
